Real Estate is the Best Anti-Inflation Play

In numerous threads I've encountered a view that real estate is a loser when rates invariably rise from inflation. I want to challenge this position, hopefully keeping within the confines of what makes a good debate according to Steven Douglas.

The bear case is this:

Shadow inventory will knock down real estate prices

Rising rates will ultimately drive down the amount people are willing to pay for a home

I submit that these are nonfactors in real estate investing. First, shadow inventory is not evenly distributed across the United States so much of it is in markets where no investor would put his or her dollars. Secondly, rising rates from inflation will not drive down the price of a home.

Real estate vs. Gold

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase. Thus, the intrinsic value of a piece of cash flowing real estate with a locked-in interest rate for 30 years should also rise.

Homes sell for less than their cost of replacement in many markets, meaning they sell for less than their intrinsic value. If inflation goes up, so do interest rates. If you stop here, you would think that people would pay less for a home because they cannot afford a $200,000 home at 10% if they barely qualify for a $200,000 home at 3%.

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase? Of course. Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

So to me, it's not an inflation issue, it's the bubble issue.

"And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat

"It is difficult to free fools from the chains they revere." - Voltaire

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

Of course, all real estate is local. I want to focus on the bubble issue, because I think the bubble is long gone. Here's the thing: I can look in my newspaper right now and find 20-50 high-quality houses that are selling for less than their cost of replacement by 20% or more. That is, if I wanted to duplicate a $100,000 home on the market, I would have to spend $120,000+ to do so.

No one can make any money building new homes in my market. It costs more to build a home than to buy one that already exists. It's fundamentally irrational to build a home where I live at the present time. Homebuilders don't make money building homes for $120,000 and selling them for $100,000.

So, with that said, I fail to see how the market is in bubble territory still. If a home is selling for less than what it would cost to make a new one, then it is hardly overvalued. Seeing as prices to construct a new home go up over time, then real estate makes a good investment.

Real estate is horrible to lease, since it can not be owned, it should not be bought for anything other than utilitarian needs (some place to live). The only difference from renting is that you are locked into a particular location. The hell I want to lease a piece of land, pay taxes on it for perpetuity, pay taxes on faux capital gains (2013+), and not be able to hide it on black market. Gold boys, gold and silver. Income producing holdings, utilities, own home business, the grayer the better.

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.

And no one should ever buy a house with credit. We have learned that when your name goes on the dotted line, the bank that pretends to loan you money; never puts forth one dime of consideration (which is mandatory in a real estate transaction) .... then they sell your signature over and over and over and over again. In many cases the 100,000. they pretended to loan you, was sold on the stock market several times before you even signed the document.

Pretend you write a blank check to someone... sign it.. You have hundreds of people photocopying it, and rather than cashing it... they are selling it.

You can't do that with a blank check ... photocopies don't play... but promissory notes/mortgages do according to the courts. Everyone look at the promissory note you signed when you purchased your home... and see how intentional it is that your signature on the last page does not correspond with the first pages. Page 1 might be a half of page... page 2 might be a full page... All they want is your signature, to something... and they will take whatever they can attach it to ... anytime past, present and future.

And no one should ever buy a house with credit. We have learned that when your name goes on the dotted line, the bank that pretends to loan you money; never puts forth one dime of consideration (which is mandatory in a real estate transaction) .... then they sell your signature over and over and over and over again. In many cases the 100,000. they pretended to loan you, was sold on the stock market several times before you even signed the document.

Pretend you write a blank check to someone... sign it.. You have hundreds of people photocopying it, and rather than cashing it... they are selling it.

You can't do that with a blank check ... photocopies don't play... but promissory notes/mortgages do according to the courts. Everyone look at the promissory note you signed when you purchased your home... and see how intentional it is that your signature on the last page does not correspond with the first pages. Page 1 might be a half of page... page 2 might be a full page... All they want is your signature, to something... and they will take whatever they can attach it to ... anytime past, present and future.

That's not the fault of credit, but of our financial system. Credit is fine and can play an important role in an economy.

In numerous threads I've encountered a view that real estate is a loser when rates invariably rise from inflation. I want to challenge this position, hopefully keeping within the confines of what makes a good debate according to Steven Douglas.

The bear case is this:

Shadow inventory will knock down real estate prices

Rising rates will ultimately drive down the amount people are willing to pay for a home

I submit that these are nonfactors in real estate investing. First, shadow inventory is not evenly distributed across the United States so much of it is in markets where no investor would put his or her dollars. Secondly, rising rates from inflation will not drive down the price of a home.

Real estate vs. Gold

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase. Thus, the intrinsic value of a piece of cash flowing real estate with a locked-in interest rate for 30 years should also rise.

Homes sell for less than their cost of replacement in many markets, meaning they sell for less than their intrinsic value. If inflation goes up, so do interest rates. If you stop here, you would think that people would pay less for a home because they cannot afford a $200,000 home at 10% if they barely qualify for a $200,000 home at 3%.

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase? Of course. Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

If you're going to buy real estate for keeps, then you want the prices to be low. If the prices are low, then you have a better opportunity to rent. If the prices go up, then you can flip it. It really depends on what you are willing to do and the skills you have. Just buying a house and waiting for the market to go up to resell is a failing strategy. You should plan to make your money back within 2 years at the most, whether that means collecting the price of the house in rent or reselling it for double your total investment. Double is a lot to ask for higher priced homes, but for people who are just starting out, a 15k house with 5k investment can turn into a 40k house at resell value if you can find it for that cheap. They could be foreclosures or even just a private sale from someone who just wants to get rid of it. That's how we got our latest house. There was no advertising involved, and you can get a pretty good deal if you talk face to face with people without relying on the marketing facade.

Real estate is horrible to lease, since it can not be owned, it should not be bought for anything other than utilitarian needs (some place to live). The only difference from renting is that you are locked into a particular location. The hell I want to lease a piece of land, pay taxes on it for perpetuity, pay taxes on faux capital gains (2013+), and not be able to hide it on black market. Gold boys, gold and silver. Income producing holdings, utilities, own home business, the grayer the better.

I don't see why taxes are such a big problem. Even if you do consider it renting from the government, do you really think they're going to step in and take it away arbitrarily? You make way more money from rent than you pay in taxes anyway. So why is that such a deferment if you pay $500/year in taxes on a small apartment building and make 20k/year in profit.

I don't see why taxes are such a big problem. Even if you do consider it renting from the government, do you really think they're going to step in and take it away arbitrarily? You make way more money from rent than you pay in taxes anyway. So why is that such a deferment if you pay $500/year in taxes on a small apartment building and make 20k/year in profit.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

It sure has been one of the best. Out stripping most commodities I would figure.

Still I don't think the markets have finished collapsing. I think things will continue on a downward spiral until we regain control of the counterfeiting of our currency. That or we are allowed some currency competition.

I think there are many areas we are going to have to re-evaluate. I've heard of a couple in recent days. I've heard people say as long as the price of gold is this high the mining will continue. Same for oil. Big boom. ? The increases all seems strictly due to inflation. And proportional. I don't really see how twice as many of something worth half as much can really get you off of your butt to do something.

I've also noticed in many areas it seems impossible to get good quality. I bought some sewing needles today and never did find any that looked like something I would sew with. Two places later I found some that looked suitable to pull splinters. I also glommed onto some great old music books that they don't print any more. They have new editions but these had ring binding that lays flat on your music stand.

I suppose there are lots of quality items out there that have increased in value and could be a real hidden investment.

I keep reading about people (mostly rich folks) putting their real estate assets in trusts - with themselves as the beneficiary. Theory here being that instead of the property being in a person's name, it's in a trust's name, hiding who actually owns the property.

I'm also seeing articles on scammers using the same tactics as actual land trusts to dupe people into signing their property over to a trust.

Disclaimer: any post made after midnight and before 8AM is made before the coffee dip stick has come up to optomim level - expect some level of silliness,

The problems we face today exist because the people who work for a living are out numbered by those who vote for a living !!!!!!!

Real estate values don't go up in an inflationary environment - they go down. Cost's to maintain go up. When values get near a real bottom then renters will jump ship and rental properties won't look so attractive due to lower occupancy ratings.

Because when people lose their jobs and their homes, the tax levy (big pool of money the government steals) can only change if the taxing authority (county) reduces staff or benefits (government employees and public unions). When this does not occur, everyone else who is staying put gets a nice increase in their tax rate.

do you really think they're going to step in and take it away arbitrarily?

It matters not what I think, it matters what the state has done. They have.

You make way more money from rent than you pay in taxes anyway.

In detroit? A renter in a detroit has the option of leaving this cesspool. An owner can not move his house out of that dump.

Anything tied to massive credit, mortgage and the banking industry is a TERRIBLE investment right now. As the derivatives stuffed full of toxic mortgages unravel you will see the bankers continue to print and hand themselves more and more unsecured 0% loans in a futile attempt to bail themselves out of the collapsing derivatives market. Real estate has NEVER been more over valued than it currently is in this country right now. These massively overvalued derivatives packages are to the financial market what a badly leaking nuclear reactor is to a city.

They have NOT stabilized these industries. They have simply stuck their finger in the dam then done nothing more because it would wipe out all the Big 5 banks. All the QE is to simply payoff the wealthiest investors who have been duped into these derivatives but are now aware. This QE is the only thing keeping JP Morgan, Goldman Sachs etc out of high profile World Court lawsuits and felony prosecutions that would bring the whole thing down in flames.

Even a 5% negative variance in the value of $100 trillion derivatives will wipe out the industry and the industry is believed to be closer to 35% because of all the corruption. Fixing even a small percentage of the derivatives problem is mathematically impossible. It has to collapse and it will take decades or even generations for the banking, mortgage and real estate market to stabilize again.

These a**holes completely screwed the real estate and lending industry for generations. The federal government did and still is just watching it all while giving the crooks an occasional "yes boss". In 2008 we were only made aware of the problem. We did NOT fix it. We are kicking a can the size of Los Angeles down the road right now.

real estate is not a global currency like gold is. Unless you want to sell your property to foreigners when the dollar collapses, I don't see how real estate is a better inflation hedge.

The problem with real estate being an inflation hedge is that real estate isn't something that can be accumulated like gold. In other words, gold is something that can be accumulated in small increments over time. Real estate must be accumulated in larger chunks for instance.

So where 100,000 will buy you a house at the right price and the right time to be a hedge against future inflation, 10,000 will not be leveraged in the same way with out a smaller denomination asset.

So conditionally sure, real estate is a great anti inflation investment, assuming one has managed accumulate regardless of macro economies.

By bubble gone, you mean the height is gone, but not that it's bursted already, right? Because if you don't believe hyperinflation is coming, you MUST believe houses will depreciate, right?

I think houses will appreciate going forward due to attractive valuations and modest inflation.

Originally Posted by cubical

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.

Yes, it doesn't mean it is undervalued, but it does mean that no one is going to make more of it until it goes back to the cost of replacement.

Originally Posted by Dianne

And no one should ever buy a house with credit. We have learned that when your name goes on the dotted line, the bank that pretends to loan you money; never puts forth one dime of consideration (which is mandatory in a real estate transaction) .... then they sell your signature over and over and over and over again. In many cases the 100,000. they pretended to loan you, was sold on the stock market several times before you even signed the document.

Pretend you write a blank check to someone... sign it.. You have hundreds of people photocopying it, and rather than cashing it... they are selling it.

You can't do that with a blank check ... photocopies don't play... but promissory notes/mortgages do according to the courts. Everyone look at the promissory note you signed when you purchased your home... and see how intentional it is that your signature on the last page does not correspond with the first pages. Page 1 might be a half of page... page 2 might be a full page... All they want is your signature, to something... and they will take whatever they can attach it to ... anytime past, present and future.

Citation needed on this whole post. I can't even keep up with what you're trying to say.

Originally Posted by NoOneButPaul

Isn't this the exact same thing the so called experts were saying right before the housing bubble burst?

Real Estate does have a long way to drop still because it was not allowed to bottom out in 2008.

I'd rather put my money into commodities like gold and silver and rent housing then to deal with owning a house through credit.

If you're going to buy real estate for keeps, then you want the prices to be low. If the prices are low, then you have a better opportunity to rent. If the prices go up, then you can flip it. It really depends on what you are willing to do and the skills you have. Just buying a house and waiting for the market to go up to resell is a failing strategy. You should plan to make your money back within 2 years at the most, whether that means collecting the price of the house in rent or reselling it for double your total investment. Double is a lot to ask for higher priced homes, but for people who are just starting out, a 15k house with 5k investment can turn into a 40k house at resell value if you can find it for that cheap. They could be foreclosures or even just a private sale from someone who just wants to get rid of it. That's how we got our latest house. There was no advertising involved, and you can get a pretty good deal if you talk face to face with people without relying on the marketing facade.

Make your money back in two years at most? By renting? You should sell your secrets on a late night infomercial.

What you're describing is mostly work and not a whole lot of investment. I'd rather make 12% per year on any amount of money I can stuff into something than 50% per year on $20,000.

Originally Posted by Carson

It sure has been one of the best. Out stripping most commodities I would figure.

Still I don't think the markets have finished collapsing. I think things will continue on a downward spiral until we regain control of the counterfeiting of our currency. That or we are allowed some currency competition.

I think there are many areas we are going to have to re-evaluate. I've heard of a couple in recent days. I've heard people say as long as the price of gold is this high the mining will continue. Same for oil. Big boom. ? The increases all seems strictly due to inflation. And proportional. I don't really see how twice as many of something worth half as much can really get you off of your butt to do something.

I've also noticed in many areas it seems impossible to get good quality. I bought some sewing needles today and never did find any that looked like something I would sew with. Two places later I found some that looked suitable to pull splinters. I also glommed onto some great old music books that they don't print any more. They have new editions but these had ring binding that lays flat on your music stand.

I suppose there are lots of quality items out there that have increased in value and could be a real hidden investment.

What?

Originally Posted by opal

While real estate is the topic. What do y'all think of *land trusts*?

I keep reading about people (mostly rich folks) putting their real estate assets in trusts - with themselves as the beneficiary. Theory here being that instead of the property being in a person's name, it's in a trust's name, hiding who actually owns the property.

I'm also seeing articles on scammers using the same tactics as actual land trusts to dupe people into signing their property over to a trust.

Seriously way too complicated of an issue to just start explaining here, but one of the benefits is anonymity.

Originally Posted by cbc58

Real estate values don't go up in an inflationary environment - they go down. Cost's to maintain go up. When values get near a real bottom then renters will jump ship and rental properties won't look so attractive due to lower occupancy ratings.

Well, we've had an inflationary environment for well over a century and home prices have gone up. What's the deal there?

Originally Posted by dinosaur

Wouldn't the type of real estate matter? If food costs go up, then won't the price of farm land have to somewhat keep pace with that?

Terrible wager at the present time. Farmland is stupid expensive, and it's more of a bet on biofuel policies than it is a bet on inflation.

Originally Posted by adams101

Anything tied to massive credit, mortgage and the banking industry is a TERRIBLE investment right now. As the derivatives stuffed full of toxic mortgages unravel you will see the bankers continue to print and hand themselves more and more unsecured 0% loans in a futile attempt to bail themselves out of the collapsing derivatives market. Real estate has NEVER been more over valued than it currently is in this country right now. These massively overvalued derivatives packages are to the financial market what a badly leaking nuclear reactor is to a city.

They have NOT stabilized these industries. They have simply stuck their finger in the dam then done nothing more because it would wipe out all the Big 5 banks. All the QE is to simply payoff the wealthiest investors who have been duped into these derivatives but are now aware. This QE is the only thing keeping JP Morgan, Goldman Sachs etc out of high profile World Court lawsuits and felony prosecutions that would bring the whole thing down in flames.

Even a 5% negative variance in the value of $100 trillion derivatives will wipe out the industry and the industry is believed to be closer to 35% because of all the corruption. Fixing even a small percentage of the derivatives problem is mathematically impossible. It has to collapse and it will take decades or even generations for the banking, mortgage and real estate market to stabilize again.

These a**holes completely screwed the real estate and lending industry for generations. The federal government did and still is just watching it all while giving the crooks an occasional "yes boss". In 2008 we were only made aware of the problem. We did NOT fix it. We are kicking a can the size of Los Angeles down the road right now.

[citation needed]

NAR's composite quarterly Housing Affordability Index* rose to a record high of 205.9 in first quarter, based on the relationship between median home price, median family income and average mortgage interest rate. The higher the index, the greater the household purchasing power. This is the first time the quarterly index broke the 200 mark; recordkeeping began in 1970.

Jordan, How do you see the quadrillion dollar derivatives market stuffed with tens of trillions in toxic mortgages effecting the future of real estate investments? How do you see the $8 trillion on Fannie/Freddies books that federal government has on a spreadsheet out in space someplace because it would destroy any government or corporate spreadsheet it was put on? How can you have so many tens of trillions in over inflated over evaluated real estate out there and consider now and the foreseeable future as "stable"?

How in the heck to you foresee "modest" inflation? The entire mortgage, loan and currency industries are propped up by ignorance and cover ups. There are literally hundreds of pages on the derivatives market out there. I can't believe you want "factual data". That is like asking for factual data sidewalks are made of cement. Type in derivatives crash and the news media of your choice. These were simply off the first page of Google. They are all totally non partisan.

Terrible wager at the present time. Farmland is stupid expensive, and it's more of a bet on biofuel policies than it is a bet on inflation.

$1,000 an acre in some parts of the US. You can get an acre of land for less than an ounce of gold. Are you saying that biofuel policies could deflate food costs, if changed? Not being argumentative, I just don't really study this stuff so am interested in the thoughts of people who do.

Jordan, How do you see the quadrillion dollar derivatives market stuffed with tens of trillions in toxic mortgages effecting the future of real estate investments? How do you see the $8 trillion on Fannie/Freddies books that federal government has on a spreadsheet out in space someplace because it would destroy any government or corporate spreadsheet it was put on? How can you have so many tens of trillions in over inflated over evaluated real estate out there and consider now and the foreseeable future as "stable"?

How in the heck to you foresee "modest" inflation? The entire mortgage, loan and currency industries are propped up by ignorance and cover ups. There are literally hundreds of pages on the derivatives market out there. I can't believe you want "factual data". That is like asking for factual data sidewalks are made of cement. Type in derivatives crash and the news media of your choice. These were simply off the first page of Google. They are all totally non partisan.

If you need a couple hundred more pages saying the same thing..... let me know.

You're discussing the notional value of derivatives, which is totally unimportant and frankly, not really related to your thesis. Anyway, talking about the notional value of derivatives as a relevant statistic is like saying the car insurance business is doomed for failure because everyone is going to get in a wreck tomorrow and spend 30 days in the hospital. Alas, that's not going to happen.

Anyway, what do all these derivatives have to do with real estate being overvalued? Is real estate also overvalued because everyone owns a homeowners insurance policy on their home, which represents trillions in potential liabilities?

Originally Posted by dinosaur

$1,000 an acre in some parts of the US. You can get an acre of land for less than an ounce of gold. Are you saying that biofuel policies could deflate food costs, if changed? Not being argumentative, I just don't really study this stuff so am interested in the thoughts of people who do.

Are you sure that $1,000 isn't old or for grazing land in the middle of literally nowhere or something? Decent corn fields are selling for $7k+ an acre in most parts of the country.

Anyway, if biofuels go away, food prices will drop dramatically. Biofuels eat up 40% of all US corn supplies each year, which exerts incredible pressure on all agricultural output. Less land being used to produce food equals rising food prices. And it goes all the way up and down the chain, since harvested crops are often turned into animal feeds which then drives up the cost of raising farm animals. So biofuel is the main driver. After that I would say increased meat demand in Asia. It takes a lot more calories of grain to make a steak or chicken breast than you get back in return.

It's a dangerous bet that's not quite as tethered to inflation as a topical view might show.